German fintech star Wirecard said $2 billion went ‘missing’ from its bank accounts. Analysts and accounting professors explain how it could have happened.

markus braun wirecard

Wirecard is a German digital payments business. It was, until recently, one of the country’s most successful tech companies. 
This week Wirecard announced that $2 billion had gone “missing” from its balance sheet. The company’s former CEO, Markus Braun, resigned and was arrested on suspicion of false accounting and market manipulation.
Business Insider spoke to fintech analysts and academics who study accounting fraud to figure out how that $2 billion might have disappeared.
One possibility is that Wirecard committed financial fraud and its auditor, EY, didn’t thoroughly evaluate the company’s financial statements, according to the analysts and academics. The German regulator BaFin has also come under fire for failing to detect evidence of financial fraud at Wirecard.
Wirecard likely buckled under the pressure of the coronavirus recession, the experts we spoke with said, and it could no longer keep up the charade about the growth of its business.

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Wirecard AG was a German tech darling.

In September 2018, the Munich-based digital payments company replaced Germany’s second-largest lender, Commerzbank AG, on the Dax 30. That’s the stock-market index for the 30 major German companies trading on the Frankfurt Stock Exchange, all of which are automatic investments for pension funds. Wirecard, which counts Apple Pay and Google Pay as clients, reported a net revenue of €2.1 billion that year.

This week, Wirecard announced that it was “missing” €1.9 billion, or about $2.1 billion, in cash, later saying it likely never existed. EY, Wirecard’s auditor, called it “an elaborate and sophisticated fraud.” Former CEO Markus Braun resigned and was arrested on suspicion of false accounting and market manipulation. Authorities are searching for Wirecard’s former chief operating officer, Jan Marsalek, who is also suspected of market manipulation. The company said it would file for insolvency. 

The downward spiral comes more than a decade after suspicions were first raised about Wirecard’s financials, and five years after The Financial Times started reporting on red flags in the company’s accounts.

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But how, precisely, does $2 billion go missing? 

We talked with fintech analysts and professors of accounting to find out what might have happened. 

Fabricating cash is much rarer than fudging revenues

Wirecard appears to have counted cash held in escrow accounts on its financial statements, The Financial Times reported. Money in escrow is held and disbursed by a third party, which would theoretically explain why Wirecard didn’t have immediate access to the cash.

The Financial Times also reported that an internal whistleblower at Wirecard alleged that the company had used a strategy called round tripping. That involves repeatedly buying and selling shares of the same security in order to make it look like a lot of transactions are taking place.

Enron, the disgraced Houston-based energy company that filed one of the largest corporate bankruptcies in American history after several executives were charged with conspiracy, insider trading, and securities fraud, was famously accused of round tripping.

In Wirecard’s case, reports indicate that the company appears to have funneled money through three third-party …read more

Source:: Business Insider – Finance

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